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Congratulations, Mexico, You're Due For A Raise

September 26, 1993

International Business

CONGRATULATIONS, MEXICO, YOU'RE DUE FOR A RAISE

Negotiators from Mexico, the U.S., and Canada huddled in Washington in August, haggling over the final details on labor and environmental standards for the North American Free Trade Agreement. As anti-NAFTA noises grew louder, the Clinton Administration needed to show that the pact wouldn't just send U.S. companies streaming across the border in search of cheap labor. So Mexican President Carlos Salinas de Gortari phoned Bill Clinton. His pledge: He would move to raise Mexico's tightly controlled wages. "We are committed to expanding job opportunities and raising our people's earnings," Salinas said.

Nice promise, but can Salinas deliver? Some experts question just how committed he is to boosting wages when low labor costs are Mexico's main competitive advantage. But the beginnings of the Salinas plan are emerging. The biggest change would link Mexican industrial wages, averaging $1.99 an hour, to productivity gains. Salinas will soon convene panels of government, labor, and management experts to examine how to modify labor contracts without derailing the economy. Giant Telefonos de Mexico (Telmex) is the first to implement a plan to award bonuses based on productivity.

Higher pay, of course, could mean more inflation, which Salinas has tirelessly attacked. But in theory, boosting productivity keeps manufacturers' costs down, counteracting any inflationary forces unleashed by increased wages.

But the pressures to deviate from this plan will be immense. Mexican manufacturers are suffering through hard times and are in no mood to pay workers more. And if productivity doesn't increase, Salinas will still be tempted to boost wages before presidential elections next year. Allowing wages to rise too quickly could fuel inflation, which would pressure the peso and maybe scare away new foreign investors.

Workers already have plenty to worry about. Even though the economy has grown an average of 3% a year over the past five years, the average worker's salary has only 65% of the buying power it had before the 1982 crash, according to the powerful Mexican Workers Confederation (CTM). Of course, more prosperous workers mean a better market for U.S. exports, a centerpiece of the pro-NAFTA argument. So Salinas has told the National Commission on Minimum Salaries to come up with a formula to raise the minimum wage, on which 18% of workers subsist.

For the 8 million Mexicans who work at large companies under union contracts, the government plans to establish company-level productivity goals. The government wants to reward gains in productivity with bonuses rather than raise overall wages. Telmex is setting the pace. It has already created a $150 million incentive pool and started awarding productivity bonuses to workers in August, becoming one of the first major companies to do so.

It's a big change for Mexico's once backward telephone monopoly. It used to be that repairmen would complete only half of their rounds during regular working hours, and save the rest to do on costly overtime. Then, complaining of low salaries, they would demand a tip of customers to do the job right. But all that started changing when Telmex was privatized in December of 1990. Under the new plan, if workers meet monthly goals, they can earn bonuses equal to as much as 30% of their salaries.

50-YEAR WAIT? In any event, no one expects Mexican wages to reach U.S. levels anytime soon. "I figure it will take at least 50 years to reduce the gap by 40%--seriously," says Congressman Juan S. Millan Lizarraga, also a CTM official. Although Mexican productivity has been rising about 6% a year--twice the U.S. rate--industrial wages in Mexico remain about one-sixth the U.S. level.

The challenge ahead may seem mind-boggling. But Mexican workers, employers, and government officials have proven over the past seven years that they are capable of sitting down at the negotiating table and hammering out effective national accords for a variety of purposes--such as bringing down inflation or promoting industrywide job-training programs. It helps, of course, that Mexico's executive branch can dictate what it wants. But pleasing a U.S. president, placating Mexican workers, and wooing industrialists all at the same time could prove to be Salinas' stiffest challenge yet.Geri Smith in Mexico City